health-2082630

FY20 earnings up despite low interest rates

Nürnberger Beteiligungs 30 March 2021 Update
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Nürnberger Beteiligungs

FY20 earnings up despite low interest rates

Insurance

Scale research report - Update

30 March 2021

Price

€76.5

Market cap

€879m

Share price graph

Share details

Code

NBG6

Listing

Deutsche Börse Scale

Shares in issue

11.5m

Liquid resources at end-December 2020

€497.4m

Business description

Nürnberger Beteiligungs is the parent company of a group of insurers and financial service companies. It is one of Germany’s oldest insurers, operating since 1884. It offers life, health and property and casualty insurance; the strongest demand is for unit-linked life, disability and pension insurance and standard pension insurance.

Bull

Strong financial position.

Well-established brand name and solid historical performance.

Stable annual dividend payments.

Bear

Low interest rate environment.

Regulatory uncertainty.

Highly competitive industry.

Analyst

Milosz Papst

+44 (0)20 3077 5700

Nürnberger Beteiligungs (NBG) delivered double-digit earnings growth in FY20, supported by slightly higher gross premiums booked, driven by new business as well as improved investment income in its traditional insurance segment. While management guidance assumes a slight decline in net income in 2021, the company is again optimistic about growth in new premiums across all segments this year. Management has proposed a dividend of €3.30/share (unchanged y-o-y), which implies a yield of 4.3%.

FY20 earnings in line with management guidance

Management comfortably delivered full-year guidance for a y-o-y increase in net income (up 14.7% y-o-y to €77.4m in FY20). NBG’s gross premiums booked rose 2.2% y-o-y to €3.59bn, compared with 1.2% growth for the wider German insurance market in the period, based on estimates from the German Insurance Association (GDV). After a slight decline in new premiums in H120, NBG’s new business gained momentum in H220, reaching €629.4m in FY20, up 6.2% y-o-y. Low interest rates continue to weigh down NBG’s results, as reflected in higher additions to reserves, with Zinszusatzreserve (ZZR) up €219.8m versus €145.9m in FY19. While the net profit of its largest life insurance segment (c 70% of gross premiums in FY20) at €37.2m was higher than management’s forecast (€31m), net profit in Property & Casualty (P&C) fell more than expected, affected by a higher combined ratio of 94.9% in FY20 versus 91.0% in FY19.

Management guides to slightly lower profit in FY21

Management guides to a slight decline in net income in FY21, which it expects will largely be affected by additions to the equalisation reserve in the P&C segment given the overall low level of claims in FY20. That said, NBG expects good momentum in gross and new premiums in the health insurance and P&C segments. The largest life insurance segment should deliver stable profits amid higher new premiums and stable gross premiums, coupled with lower net investment income and a continued increase in ZZR, according to management.

Valuation: Offering a 4.3% dividend yield in FY21

NBG’s FY20 P/E of 11.4x represents a 14.3% discount to peers. Management has proposed a dividend of €3.30 per share based on FY20 earnings, which implies a yield of 4.3%, slightly lower than the median 5.1% for its peers.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

4,387

147.3

8.1

3.0

9.4

3.9

12/18

4,404

97.3

5.1

3.0

15.0

3.9

12/19

4,567

81.3

5.9

3.3

13.0

4.3

12/20

4,568

92.3

6.7

3.3

11.4

4.3

Source: NBG accounts, Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY20 results backed by higher new premiums

NBG’s overall revenues (including insurance premiums, investment income, and fee and commission income) remained stable at €4.6bn in FY20, which was mostly a function of slightly higher gross premiums booked and improved new premiums, offset by lower investment income in the period. NBG’s gross premiums booked increased 2.2% y-o-y to €3.59bn in FY20 (in line with NBG’s guidance of a slight increase), supported by dynamic growth in the health insurance and P&C segments (up 10.7% and 3.5% y-o-y, respectively). The life insurance segment saw lower momentum in the period (+1.0% y-o-y), affected by limited direct contact with customers due to social distancing measures (in Q220 in particular) and the lower interest environment limiting the attractiveness of traditional life insurance products. NBG’s premiums earned increased by 1.9% year-on-year.

We note that the company outperformed the wider German insurance market in 2020 in all three market segments with respect to growth in gross premiums. According to the GDV, the German market saw a 1.2% growth in gross premiums booked in FY20 (to c €220bn), posting a 0.4% y-o-y reduction in the life segment and an increase in the P&C and health insurance segments of 2.1% and 3.8% y-o-y, respectively.

NBG’s new premiums rose 6.2% y-o-y to €629.4m in FY20 (vs NBG’s forecast of a slight y-o-y increase). The most notable contribution came from the life insurance segment (up 6.5% to €482.2m), although P&C and health insurance also saw healthy growth in the period (up 4.3% y-o-y to €133.4m and 16% y-o-y to €13.8m, respectively). Management highlights that new business was supported, among other things, by the solid tech infrastructure of NBG’s salesforce after it completed a major IT infrastructure project in FY20. We discuss other drivers for new premiums in more detail below. Net commission income (largely attributable to NBG’s banking services segment) reached €56m in FY20, up 10.6% y-o-y.

It is noteworthy that investment income from traditional insurance products was up 7.9% y-o-y to €782.4m, assisted mostly by higher current income (€665.0m in FY20 vs €569.9m in FY19) from equities and other non-interest bearing investments, which included a larger distribution from a special fund. NBG’s gross aggregate reserve for conventional insurance rose by a notable €751.2m (€556.7m in FY19), including a €219.8m addition to the ZZR (€145.9m in FY19), triggered by a further reduction in market interest rates. In parallel, reserves related to NBG’s unit-linked business were down to €68.5m (compared to a €1,519.7m increase in FY19), corresponding to a change in the value of related investment held in the unit-linked products.

Operating expenses declined to €558.7m from €582.9m a year earlier, primarily resulting from lower acquisition costs (€413.1m in FY20 versus €444.7m in FY19) amid reduced commission expense in the life insurance segment. Pre-tax profit reached €92.3m in FY20 vs €81.3m a year earlier (or €103.4m when adjusted for a negative extraordinary result of €22.1m in FY19 related to restructuring measures) and net income (ex-minorities) increased to €77.4m from €67.4m in FY19, in line with management guidance for a y-o-y increase. In the period, the company booked €21.1m positive effects from 1) the consolidation of Nürnberger Asset Management (which should also contribute to NBG’s earnings going forward) and 2) one-off gains from the disposal of stakes in associates. Management has proposed a dividend of €3.3/share, unchanged versus FY19.

NBG maintains a good balance sheet position. In October 2020, Fitch reaffirmed its A+ rating for NBG’s subsidiaries (ie NÜRNBERGER Lebensversicherung, NÜRNBERGER Allgemeine Versicherung and NÜRNBERGER Krankenversicherung) and NBG’s issuer default rating of A. The outlook for all ratings is stable. NBG’s liquid resources (ie bank balances, cheques and cash in hand) stood at €497.4m at end-FY20 versus €600.6m at end-H120 and €415.3m at end-FY20.

Exhibit 1: FY20 results highlights

€m

FY20

FY19

% y-o-y

Gross premiums booked

3,592.9

3,515.3

2.2%

Premiums earned

3,314.5

3,251.5

1.9%

Net result on premium refunds

(264.9)

(240.0)

10.4%

Investment income

720.2

896.2

-19.6%

Unrealised profits/losses from unit-linked insurance investments

164.1

1,391.5

-88.2%

Other net technical income/(expense)

(29.8)

(28.1)

6.2%

Claims expenses

(2,524.0)

(2,469.6)

2.2%

Change in other technical provisions

(671.0)

(2,074.6)

-67.7%

Operating expenses

(558.7)

(582.9)

-4.1%

Change in equalisation and other reserves

(20.6)

(20.1)

2.6%

Other net (non-technical) income/(expense)

(37.0)

(20.1)

83.7%

Goodwill amortisation

(0.5)

(0.6)

-15.5%

Extraordinary result

0.0

(22.1)

N/M

Pre-tax profit

92.3

81.3

13.5%

Income and other taxes

(13.8)

(12.5)

10.4%

Effective tax rate

14.9%

15.4%

-42bp

Net income (including minorities)

78.5

68.8

14.1%

Minorities adjustment

(1.1)

(1.4)

-17.6%

Net income (ex-minorities)

77.4

67.4

14.7%

Source: NBG accounts

Segment analysis

In the life insurance segment, gross premiums were broadly stable at €2,502m (versus €2,478m in FY19), while new premiums increased by 6.5% y-o-y to €482.2m. The latter were driven by 18.7% y-o-y growth in the single premium business, which more than offset a 15.0% y-o-y drop in regular premium products. Segmental net profit was down 8.6% y-o-y to €37.2m, although still ahead of company guidance of €31.0m.

NBG’s P&C segment saw healthy growth in gross premiums booked and new premiums (up 3.5% and 4.3% y-o-y, respectively). New business benefited from strong demand for property, liability, and accident insurance (new premiums up 18.8% y-o-y), which more than offset a decline in vehicle insurance (down 4.2% y-o-y). While premiums earned grew 3.6% y-o-y to c €617.9m, claims expenses were also higher (up 3.6% y-o-y to c €360.0m) as a lower volume of claims expenses from accident and vehicle insurance due to lockdowns did not compensate for increased claims linked to company closures, event cancellations and business interruptions. Consequently, the combined ratio increased to 94.9% from 91.0% a year earlier and segmental net profit was down 27.9% to €18.6m, visibly below company guidance of a slight y-o-y rise.

The health insurance segment remained unaffected by the COVID-19 pandemic, posting a 24.0% y-o-y growth in net profit to €6.2m in FY20. New premiums in this segment (up c 16% y-o-y to €13.8m in FY20) continue to benefit from strong demand for full and supplementary insurance products. Net profit in the banking segment declined to €6.1m in FY20 from €6.8m in FY19, affected by higher operating expenses and lower interest income, which was only partly offset by improved fee and commission income.

Management expects slightly lower profit in FY21

GDV expects that gross premiums in the German insurance market will rise 2% y-o-y in 2021, with life insurance up 2% y-o-y, P&C up 1.5% y-o-y and health insurance up 5% y-o-y. Growth in life insurance should be assisted by including some catch-up effects from 2020, for example in pension products. P&C insurance may be negatively affected by the impact of reduced mobility on car insurance, as well as uncertainty among industrial companies, while GDV expects positive effects from private property insurance.

At group level, management expects stable gross premiums booked in FY21, assisted by significant growth in new premiums. That said, NBG guides to a slight decline in net income in FY21, largely due to higher additions to the equalisation reserve in the P&C segment. The latter will reduce the P&C insurance segment’s net profit to c €14m (vs €18.6m in FY20) despite higher gross premiums booked and new premiums in this segment, as expected by the management.

In the life insurance segment, management guides to significantly higher new premiums and stable gross premiums booked in FY21, as well as an unchanged segment result, mostly because of a reduction in net investment income and a continued increase in ZZR. Management acknowledges that net investment income in FY20 was achieved in favourable capital market conditions and is not assuming that the capital market environment in FY21 will be similarly supportive. At the same time, net investment income will be negatively affected by low interest rates, according to management. NBG’s strategic focus in this segment is on 1) income protection products in response to the persistent low interest rate environment; 2) the unit-linked offering in the private pension segment; and 3) ongoing digitalisation of the IT infrastructure, which should help the company transform from a ‘risk taker’ to a ‘health partner’ for its clients.

In the health insurance segment, both gross premiums booked and new premiums should grow significantly, with the latter continuing to be driven by supplementary and corporate health insurance products, according to management. NBG expects net profit in this segment will rise to c €7m in FY21 from €6.2 in FY20. Finally, management forecasts that the banking segment will achieve a similar profit to FY20 as better results in its asset management business and a slight growth in fee and commission income are unlikely to compensate for lower interest income in the period.

Valuation

NBG’s shares are trading at a FY20 P/E ratio of 11.4x, which represents a 14.3% discount to its peer group median, while its FY21e P/E ratio of 11.5x is 13.3% above the peer group average. However, we note that Refinitiv consensus on NBG are based on the estimates of one analyst, which was last updated in September 2020. Management has proposed a dividend of €3.30/share for FY20 (unchanged y-o-y), which implies a 4.3% yield compared with a 5.1% median yield for its peers.

Exhibit 2: Peer group comparison

Market cap
(m)

Share price
Local ccy

P/E (x)

Dividend yield (%)

2020

2021e

2020

2021e

UNIQA Insurance Group

€2,002

6.46

57.7

8.8

2.8

6.3

Helvetia Holding

CHF5,928

111.80

23.8

12.0

4.5

4.7

Baloise Holding

CHF7,891

161.70

16.0

12.1

4.1

4.3

Ageas

€9,853

50.50

8.5

10.5

5.3

5.4

Swiss Life Holding

CHF14,917

465.90

13.7

11.8

4.4

4.9

NN Group

€13,667

41.26

10.9

9.3

6.4

5.9

CNP Assurances

€11,149

16.19

8.6

8.0

6.4

6.0

AXA

€54,948

22.66

12.5

8.3

6.2

6.7

Allianz

€88,735

214.60

13.2

10.7

4.5

4.8

Talanx

€9,151

36.20

13.3

9.8

4.2

4.4

Peer group median

 

 

13.3

10.1

4.5

5.1

Nürnberger Beteiligungs

€879

76.50

11.4

11.5

4.3

4.3

Premium/(discount)

 

 

(14.3%)

13.3%

(3.9%)

(15.7%)

Source: Refinitiv. Note: Priced at 29 March 2021. Note: Refinitiv consensus for Nürnberger Beteiligungs is based on the estimates of one analyst.

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